What Will Happen To Coles And Woolworths In 2015?

Coles and Woolworths spent much of 2014 defending their behaviour in court. The Australian Competition and Consumer Commission (ACCC) brought several actions against one or both of them throughout the year for breaching undertakings, misleading consumers and bullying suppliers.

The case actually involved two separate claims. Both concerned allegedly unreasonable demands by Coles for payments from its smallest suppliers.

The ACCC and Coles were ordered to mediation and quickly reached an agreed outcome, subject to the judge's approval.

'Deliberate, orchestrated and relentless'

Just before Christmas, Justice Michelle Gordon delivered her decision. Accepting the proposed settlement, she ordered penalties against Coles in the order of $10 million plus more than $1 million in costs.

In her decision, Justice Gordon repeatedly described Coles' conduct as "deliberate, orchestrated and relentless", and questioned the maximum penalty for unconscionable conduct. At $1.1 million per contravention, she observed, this was "arguably inadequate for a corporation the size of Coles".

In addition to the substantial penalties, Coles gave undertakings to the ACCC. These will allow more than 200 small suppliers to engage in an audit process, examining whether Coles' demands for payments were justified and -- if not -- enabling repayment.

Was Woolworths doing the same thing?

Even as Justice Gordon was reviewing the submissions of Coles and the ACCC, there were reports that Woolworths was behaving unconscionably.

Those claims concern Woolworths' "Cheap cheap" advertising campaign and seem somewhat similar to some of Coles' alleged conduct: leaning on suppliers to bridge a perceived "profit gap".

Wasn't there a code of conduct to deal with this?

Lurking in the background to these various allegations was the Grocery Code of Conduct. This document -- largely negotiated between the Australian Food and Grocery Council, Coles and Woolworths -- was released as a draft in late 2013, and then put to public consultation by Treasury.

Much of the conduct at the heart of the case against Coles, and the more recent allegations against Woolworths, falls within the scope of the code. For example, under Treasury's consultation draft, the major chains:

couldn't demand payments for wastage (where stock is lost or damaged), as Coles did

couldn't retrospectively amend agreements with suppliers, as Coles did and Woolworths is alleged to have done

couldn't de-list stock other than for "genuine commercial reasons" -- something Coles confessed to doing, and Woolworths is accused of doing.

The code also seeks to limit the ability of supermarkets to demand their suppliers contribute to the costs of promotion, which seems to be subject of the accusations against Woolworths.

There were strong rumours towards the end of 2014 that the code would be prescribed under the Competition and Consumer Act. This would mean that a party that agreed to be bound by the (voluntary) code but then breached it would also breach the law. But the rumours came to naught and the code remains in limbo.

So how is 2015 likely to play out?

The ACCC is certainly not hanging around waiting. ACCC Chairman Rod Simms has repeatedly said supermarkets are a top priority for the regulator. But the ACCC has been quite strategic in the way it has pursued potential claims.

The concerns that the average person on the street tends to have about the major supermarkets relate to their market power: we like $1 milk or 85c bread, but worry about what it means for farmers; private labels are okay, as long as we can still buy our favourite brand; and does the strength of the majors mean the independents are being muscled out?

These sorts of issues are typically addressed under the competition provisions of the Competition and Consumer Act -- most often via the regulation of mergers, the misuse of market power prohibition and other provisions that restrict conduct that substantially lessens competition.

Despite the ACCC's intense scrutiny of the major chains, no competition case has been brought against either in the last 15 years. Instead, the ACCC seems to be targeting "low-hanging fruit", in the form of consumer protection and unconscionable conduct cases and breaches of undertakings.

The ACCC may have several reasons for adopting this approach, not least that competition cases are notoriously long, complicated, expensive and uncertain. Even hard-fought wins can turn out to be pyrrhic victories.

In the 1990s, Safeway (Woolworths) was accused of bullying conduct against bread suppliers and the ACCC successfully prosecuted it for misusing its market power and obtained substantial penalties. But the alleged victims received no compensation, and the case took more than nine years to resolve. The ACCC's unconscionability action against Coles was clearly far more effective for the small suppliers involved.

But there are downsides to taking the competition provisions out of the mix. As noted by Justice Gordon, the penalties are significantly lower. The ability of the court to constrain future conduct via injunctions is also affected, because reframing bullying conduct from a misuse of market power to unconscionability means the court is not actually examining the cause of the competition problem.

That said, this strategy could well be the case of death by a thousand cuts. Coles in particular took several hits in 2014 and it looks like Woolworths could be in for some heat in 2015. If the code of conduct is prescribed, there could be even more trouble to come.

Alexandra Merrett is a competition lawyer and Senior Fellow at University of Melbourne.

There aren't any legal restrictions, I think, just business ones. There's bargaining power negotiations and having to deal with two extremely wealthy players that will sooner incur a lot of cost than let another entrant seriously threaten their duopoly. And the cost-of-entry is probably pretty bad if you're expecting low margins (to compete with the established companies).

Plus, for foreign companies: creating business links with the different brand tastes. Aldi has there own brands but they'll never enter the mainstream, people like local businesses.

Yeah I reckon you called it correctly there Spruppet. Significant barriers to entry to our markets exist and that hurts us, the consumers. In addition to ridiculous supermarket prices for some items, it's why we have to suffer the Australia tax for just about everything, notwithstanding the weakening AUD. I must be an old fart, because every time I go to a supermarket I remember when fruit and veges were cheap, for a long time now they haven't been, but farmers are getting screwed all the same. Also, there's a lot that could be done to encourage investment from OS companies that would flow through to lower prices from increased competition, but the argument is always nope, don't want to send profits offshore. Quite laughable really when you consider the local benefits from increased competition - and where do the profits of the incumbent majors go in any case? Vested political interests don't align very well with the interests of the consumer, and that's also a significant factor. All the above is just a fraction of the issues, and also the ACCC is hamstrung by internal and external factors.
*end of rambling rant*

Not so sure about that.
IGA/MetCash have been also dinged for some underhand business practices, annual junkets / 'overseas business trips' for buyers, forced rebates, etc by Cofco/FastTrack. Rebates of 69% of cost of goods sold seems awfully steep.

how naive can you be? By letting a foreign competitor in, they won't be corrupt?
We need tougher laws and better protection for Australian suppliers. That WILL fix the problem. Using overseas businesses will increase the number of companies abusing the system.

Naive? No one mentioned corruption, just competition. It may be a long stretch for an international company to set up in direct competition to the big two, but corruption is an issue that the ACCC is supposed to take care of!

I just go to the butcher and Vegetable shop now. Accidentally fell into this habit by attempting to eat healthier fresh food.
I just go into one of the supermarkets for toilet paper or washing detergent etc.

It's because of such dodginess that I refuse to buy any supermarkets own brand products, regardless of how much cheaper they are. They're only cheaper because Coles and Woolworths has paid next to nothing to the people making the stuff that goes into them.

The code also seeks to limit the ability of supermarkets to demand their suppliers contribute to the costs of promotion, which seems to be subject of the accusations against Woolworths.
Unless I've misunderstood, that's way dodgy. Making a wheat or dairy farmer pay Woolworths to promote the fact their bread and milk is so cheap said farmer can't make a living is just cruel.

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